Most FMCG companies admitted that discretionary products went out of the shopping carts
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When insights and consulting company Kantar, together with GroupM’s rural and experiential marketing unit Dialogue Factory, launched its Rural Barometer Report last month, it probably did not foresee the kind of March quarter earnings the fast-moving consumer goods (FMCG) companies would report. Companies across the board reported flat volume growth and a demand slowdown especially in rural markets, pressure on margins because of high input costs and consumers downtrading and eschewing discretionary products.
Though the Rural Barometer report, which studied post pandemic purchase patterns in rural India, said that lower social classes (NCCS CDE) and rural youth (18-24 year olds) are concerned about job security, it expected recovery in rural India. It said during the lockdown and first half of 2021, consumers prioritized health and hygiene categories so indulgence and vanity categories remained subdued. However, these bounced back as rural consumers expanded their baskets to add personal care and snacking products, a senior executive at Insights Division of Kantar said. However, the executive added that “inflation could be a dampener."
On ground, that’s how the FMCG story has unfolded with unprecedented inflation leading to price increases and depressing demand. Though commodity prices, especially for edible oils, have been high since September 2021, the Ukraine crisis and then Indonesia banning the export of palm oil, has fuelled inflation.
Most FMCG companies admitted that discretionary products went out of the shopping carts. On Monday, Marico’s managing director and chief executive officer Saugata Gupta told Mint that both food and general inflation have impacted disposable incomes and the ability to spend on FMCG products, especially in rural India. So rural consumers either downgrade or “titrate" depending on the product category, he said. Even Hindustan Unilever Ld flagged the severe impact on discretionary consumption.
That rural markets are crimping on spends was amplified when consumer firms said that categories such as hair oil and oral care have registered a decline in volumes. While some hair oil brands saw marginal growth, the overall category saw a volume decline of 7%. Though Dabur India’s oral care portfolio grew in the March quarter, the toothpaste market recorded a 5% decline. Analysts said toothpaste volumes may have plunged as consumers may have downgraded to smaller SKUs.
Clearly, all FMCG companies, big or small, have been hit by the dramatic rise in input costs during the quarter. Rajat Wahi, partner, Deloitte India, said, “We’re clearly seeing a K shaped recovery at present with urban markets seeing strong growth and rural and rurban markets seeing a de-growth or slowdown."
Rural, which saw a major spike in consumption last year, was facing challenges even pre-covid, with 2019-20 being a very difficult year for multiple reasons, he pointed out. “So the spike in 20-21 may have been caused by a lot of government benefits being given to the rural population during the covid pandemic, the state elections which see a major spike in spending by parties, and reverse migration. With many of these not happening in 2022-23, we may be seeing a slowdown again, majorly impacted further by inflation, which is causing the downtrading," he said.
But weak demand hasn’t discouraged FMCG companies from driving aggressive expansion in India’s hinterland. Dabur said it will continue to plough investments behind its power brands (Dabur Chyawanprash, Honey, and Pudin Hara), as well as put money to grow its rural footprint. The company added 30,000 villages to its network in the past one year. Marico, too, said it will drive rural distribution aggressively. Industry figures suggest that 8 lakh FMCG stores were added during the pandemic and 50% of these were in rural markets.
While rural India has been a growth driver for most packaged consumer goods companies, which draw 30-47% sales from these markets, rural demand may remain tepid in the medium term.
Yet FMCG firms and analysts are pinning their hopes on a good monsoon to drive consumption. Wahi said that with all government programmes aimed at higher spends in rural India such as building infrastructure, roads, railways, digital connectivity, coupled with a normal monsoon and strong food consumption, including food price inflation, which should put more money in the hands of consumers, the rurban and rural consumption should start to see an uptick. “This, provided fuel and other inflationary trends do not continue," he said.